Fairchild Water Technologies, Inc.

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I. INTRODUCTION

Fairchild Water Technologies was founded in 1980 by Eugene Fairchild. The company’s first product was a desalinator used by mobile home parks in Florida to remove salt from well water supplied to residents. As the desalinator became a huge success, the company expanded into the coastal region’s adjacent to the company’s headquarters in Tampa, Florida, and then to desert areas in the southwestern United States. By 2002, they had expanded their product lines to include desalinators, particle filters, ozonators, ion exchange resins, and purifiers.

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Their products were generally priced higher than their competitors, but regarded to be superior in terms of performance and quality.

In the year 2000, Fairchild Water Technologies was expected to have revenues of $400 million, and an estimated profit of $50 million. For the past five years, they posted a 12 percent growth in their annual sales. In 1985, the company managed to start its exports to Mexico, Belize, and later to water bottlers in Germany. By 1990, due to the rapid growth in export sales, the company established its International Division.

Sales in the International Division grew to $140 million in 2000. About 50 percent of International sales came from Latin and South America, $30 million from Europe, and $40 million from South Asia and Australia.

In 1995, the company’s Frankfurt, Germany office stressed the need to develop and market products that target consumer households. The first idea was to develop a home water filter. By late 1995, the company was able to develop two models that were designed in the U.S. and introduced in Germany, Poland, Hungary, Romania, the Czech Republic, and Slovakia.

The products were greatly successful. But, the quality of water in developing countries required a purifier instead of filters. Thus, in late 1999, company executives initiated the development of a water purifier which was given the brand name “Delight”.

The Delight purifier was able to remove “reasonable levels” of sediments, organic and inorganic chemicals, microbials, cysts, and unpleasant tastes and odors. Reasonable levels are those described by several World Health Organization (WHO) reports as appropriate for potable waters. Also, engineers had repeatedly assured Mr. Chatterjee, the company’s international liaison, that laboratory testing showed no product failure after 5,000 hours of continuous use. Chatterjee used his expertise in the Indian market to direct engineers into pursuing a “point of use” design instead of a “point of entry” design.

Moreover, Chatterjee provided engineers with some recommendations such as the ability to add a small battery that will act a power source in case of power failure. Additional recommendations included the ability to add fluoride, vitamins, and flavors, flow rates, dimensions, and storage capacity. Through consumer surveys, Chatterjee was able to determine a market preference for the countertop design over the wall- mount design.

II MARKETING ISSUES

Fairchild Water Technologies is seeking to enter the Indian Market in the water purifier product category. They have had a successful track record in designing and marketing home purifiers in European and South American Markets. In this case, they are trying to enter the market in a developing market that is in the process Liberalization. Accordingly, they are facing multiple marketing issues that are critical for the success or failure of their product. The list of marketing issues includes the following:

1. Select to forgo any entry into the Indian market

2. Enter the market under a licensing agreement

3. Enter the market by utilizing a joint venture and a skimming pricing method

4. Enter the market by utilizing a joint venture and a penetration pricing method

In addition to these primary marketing issues, Fairchild Water Technologies had to decide whether they want to target urban areas or rural areas where the quality of water is poorer and where 80% of the population lives. It was determined earlier that the company would forgo the rural opportunity for now, due to the lack of a much needed infrastructure. Also, the company established an approach to manufacture in India, where labor is much cheaper when compared to the United States. However, the company would import few components that are critical for operations. Finally, it was recommended that Fairchild should seek an Indian partner that is big enough to have a distribution and manufacturing infrastructure, but not too large where it commands the direction of the product line.

III. SITUATION ANALYSIS TASKS

A. Buyer Behavior

Many Indians emphasize the need for and improved water quality. Newspapers, consumer advocates, government officials, and the general public are aware of the poor quality of Indian water. The majority of Indians have no choice but to consumer the water that is accessible to them. But, better educated, wealthier, and health-conscious Indians took some measures to improve the quality of water that is consumed by their families. It is estimated the number of such households is around 40 million.

Health-conscious households are similar to middle- and upper-middle class households in the U.S. and Europe. They cherish convenience and product variety, and consider consumption of material goods as a means to higher quality of life. Moreover, Chatterjee’s research suggests that product performance was important consumers. Some product characteristics that were cited include the ability to remove sediments, bacteria and viruses, capacity, safety, and foot print space.

Purchase price was important for market segments that boiled water, boiled and filters, or only filtered their water. The third most important factor was the ease of installation and service, along with style and appearance. The least important factor was warranty and the availability of financing. Finally, there was an agreement among all segments that the purifier should have a warranty between 18 and 24 months, and to perform between 5 and 10 years without any issues.

B Customer Segmentation

The Indian market could be segmented by consumer’s ability and willingness to use a water purification device. Research shows that there are 40 million households that include middle- and upper middle class families, that value quality and a European / American lifestyle. In addition there is an untapped market segment in the rural areas that have a need for water purifiers, but are either isolated or do not have the means to buy a water purifier.

C Competitive Market

Mainly, Fairchild Water Technologies will be competing for market share with companies that manufacture and sell water purifiers. But, there is also a need to address competitive methods that are currently being used by health-conscious Indian consumers. For instance, fifty percent of the target market utilizes a traditional method to purify water. A maid, cook, or family member would boil two to five liters of water, allow it to cool, and transfer the bottles to a refrigerator.

Boiling water is seen as inexpensive, effective against dangerous bacteria, and ingrained in people’s traditions. In fact, many consumers consider it to be more effective than any other product on the market. However, boiling affected the tastiness of water and made it “flat”. Also, boiling was considered to be burdensome, time-consuming, and ineffective in removing physical residues and unpleasant odors. Ten percent of this target market took an extra step and boiled water through “candle filters”, despite knowing that recontamination could occur.

At the same time, about 40 percent of the target market used a mechanical device to improve the quality of water. Half of this group used candle filters because of their low price and ease of use. The candle filter is made of two containers that sit on top of each other; the top container has one or more porous ceramic cylinders known as candles. Candle filters stored between 15 and 25 liters of water and cost between Rs. 350 for small plastic models to Rs. 1,100 for a large stainless-steel model. However, candle filter were slow, required cleaning, and needed candle replacement at least once per year.

Half of consumers that work on improving the quality of their water use “water purifiers”, which are considered to be more sophisticated than traditional candle filters. Water purifiers utilize three processing stages. First, sediments are removed, followed by odors and colors, and finally bacteria and viruses. While Fairchild’s engineers were skeptical about the efficiency of these products, they agreed that they are more helpful than candle filters. In fact, candle filters were proven to be ineffective in removing bacteria and viruses. Water purifiers were made from stainless steel and sold anywhere between Rs. 2,000 and Rs. 7,000. Ten percent of the target market did not use any of these procedures and thought that their water quality was acceptable. Overall, Catterjee believed that 90 percent of the target market could be induced to change their current purification method.

In addition to traditional water purification methods, it was determined that almost 100 companies competed for share in the Indian home water filters and purifiers market. The most established water purifier was Eureka Forbes, which was established in 1982 as a joint venture between a Swedish company and an Indian company. The company marketed water purifiers, vacuum cleaners, mixers, and grinders. Aquaguard, the brand name used for purifiers, was highly established and many consumers mistakenly used it to refer to the entire product category. Aquaguard was the market leader, but its manufacturing company had introduced a new product called “Puresip” that used polyiodide resin instead of ultraviolet rays to kill bacteria and viruses, which meant that water, could be stored for later use. Also, “Puresip” did not require any electricity to operate, but it was sold in small home appliance stores instead of a direct sales force. Aquaguard sold for approximately Rs. 5,500, while Puresip sold for 2,000. Puresip sales were growing at a much faster rate than Aquaguard.

Aquaguard was mounted on a kitchen wall, and required plumbing and a two meter long power source. The unit would stop functioning if power supply dropped to 190 volts or lower. The flow rate was considered to be slow at one liter per minute, and had enough carbon to last only for one week. Aquaguard targeted households that make more than Rs. 70,000 per year, and spent 11% of its sales revenues (Rs. 120 million) on sales activities; about Rs. 100 million were spent on sales commissions, and about Rs. 1 million was spent on advertising. Eureka Forbes was well established, had a highly motivated and well managed sales force. However, they had limited reach in rural areas that represents 80% of the country’s population.

Another direct competitor is Ion Exchange and its home water purifiers with the brand name ZERO-B (Zero-Bacteria). In 1985, the company became a wholly owned Indian company, and it serves customers in a diverse group of industries including thermal power stations, fertilizers, refineries, textiles, automobiles, and home water purifiers. Zero-B used a halogenated resin technology that was able to remove impurities, eliminated odors and tastes with carbon, and killed bacteria using iodine. The unit stored 20 liters of water for eight hours without the risk of recontamination, and sold for Rs. 2,000, but required a yearly replacement of halogenated resin at Rs. 200. Chatterjee estimated the Zero-B had about 7% market share, and lacked consumer awareness, had limited distribution, and limited advertising. There were rumors that Zero-B intended to implement door-to-door sales strategy with an expected marketing expenditure of Rs. 3 million.

The third and most recent competitor to enter the Indian market was Singer, a subsidiary of the Singer Company located in the United States. The company provides a variety of products to the Indian market such as sewing machines, irons, mixers, toasters, and color televisions. The company had estimated sales of about Rs. 900 million.

The Singer Company manufactured a home purifier called “Aquarius”. The product sold for Rs. 4,000, required no electricity, had a single countertop model, had a flow rate of 3.8 liters per minute, and a life span of 4 to 6 years. The product looked impressive, according to Chatterjee, and was described as “state of the art” by a trade article. The resin used by Aquarius was developed by NASA and was proven 100 percent effective against bacteria and viruses. Aquarius had hoped to sell 40,000 units over the next two years. Singer’s distribution channels were superior to competitors and included 210 company owned showrooms located in major urban areas around the country. The product was also sold by 3,000 independent dealers, who were supplied by 70 distributors. Distributors earned a margin of 12 percent of the retail price, while dealers earned a margin of 5 percent.

Along with many other products, Zero-B and singer accounted for 60,000 units in sales for the year 2000, while the remaining 190,000 units were sold by Aquarius and Puresip.

E SWOT

1 Strengths

a. Proven track record in exploring and entering new markets

b. Superior product quality

c. Market knowledge and ability to produce innovative products

2. Weaknesses

a. Lack of knowledge about the Indian market

b. Large segments in the market live in remote areas

c. Variable needs in the market, depending on the city or metropolitan area

d. Lack of established manufacturing and distribution capabilities

3. Opportunities

a. Return on assets in India averages 18% compared to 11% in the U.S. b. Low wages, and central location to wealthier South Asian Countries c. Liberalization trends in India and market development

d. There is no significant dominance by one brand

4. Threats

a. Legal environment and expensive litigation
b. Large number of competitors
c. Some established brands with extensive knowledge about the Indian market

IV. STRATEGY

A. Strategy recommendation & decision

a. Select to forgo any entry into the Indian market

ADVANTAGES

Avoid the risk of entering the market in a developing country, where there is still some uncertainty about the extent of economic liberalization. Avoid competing with over 100 products that are currently available in India. Expand market presence in countries such as Mexico, Germany, Poland, etc.

DISADVANTAGES

Forgo the opportunity to sell products for over 40 million households.

Lose the opportunity to have large profit margins

Lose the opportunity to manufacture in a country where labor is cheap

Limited market presence in South Eastern Asia, where the majority of the world’s population lives. Increase market presence and brand awareness.

b Enter the Indian market under a licensing agreement

ADVANTAGES

Low capital investment is required
Higher return on investment and lower amount of risk
Huge market potential and opportunities to expand in rural areas

DISADVANTAGES

Limited control of the manufacturing and distribution process

Forgo the potential of large gains in exchange of a royalty fee

Limited exposure to the selling process in a developing market

Limited ability to manufacture additional product lines

c Enter the Indian market through a joint venture and by utilizing a skimming pricing approach

ADVANTAGES

Larger potential gains and a 50/50 split in profits
Ability to influence manufacturing and distribution strategies Ability to expand into rural areas and increase manufacturing capacity Develop a market knowledge for growing and developing economies

DISADVANTAGES

Requires a large investment
Higher prices than competitors
Uncertainty of markets in developing countries
High competition

d Enter the Indian market through a joint venture and by utilizing a penetration pricing approach

ADVANTAGES

Profits are split between the two companies
Ability to control manufacturing and distribution
Developing market with large potential
Higher margins and low manufacturing costs
Gain market exposure and proximity to emerging economies

DISADVANTAGES

Requires a large capital investment
Uncertainty of developing markets
Lower pricing strategy and lower contribution margin per unit sold Ability to find the right company to partner with

Recommended Plan of Action: Fairchild Water Technologies should pursue a licensing agreement with an Indian company.

B Goals and Objectives

a. Pursue a licensing agreement with a partner that is able to sell at least 75,000 per year b. Increase sales by 10 % on an annual basis

C Target Market

The target markets for Fairchild Water Technologies are the 40 million households in India, which cherish a comfortable, convenient, and healthy lifestyle, and are similar in many aspects to middle- and upper-middle class households in the U.S. and Europe. Also, Fairfield Water Technologies should target consumers that move from lower to middle class, as the Indian market develops and continues to grow.

D Marketing Mix

a. Product / Price Strategy

Fairchild Water Technologies should manufacture a portable purifier that offers Indian consumers the convenience and effectiveness of a quality purifier. The purifier should have a backup battery, a selling price of Rs. 5,000, and a proven ability to kill bacteria/viruses, fast flow rate, and allow for the ability of storing water without the risk of contamination.

b. Distribution and Sales

By entering into a licensing agreement, Fairchild Water Technologies decreases the amount of risk, but it has less control over the distribution and sales of its product. Fairchild could seek a partner that is willing and have the capability to sell 75,000 units on an annual basis, with a 10% increase in the units sold for every year. This approach would still guarantee Fairchild Water Technologies some sizable profits.

c. Advertising and Promotion

By selecting a licensing strategy, Fairchild Water Technologies would not commit itself into having an advertising budget. On the other hand, the licensee would be obliged to advertise the product in order to meet the minimum quota for annual sales. This allows Fairchild to have an average profit of 300 Rs without committing any resources into salaries or advertising budget.

E Control Plan

The licensing agreement would adopt a language that guarantees Fairchild Water Technologies annual sales of 75,000 units, with a 10% increase in units sold thereafter. The agreement should have an opt out clause for both parties after three years, while holding the licensee to infringe on the technology and patent if they choose to opt out of the agreement. Fairchild must monitor sales on a monthly basis, and conduct meetings in order to ensure that sales in the Indian market are heading in the right direction.